Yahoo Deal Is Big, but Is It the Next Big Thing?

SAN FRANCISCO — In moving to buy Yahoo, Microsoft may be firing the final shot of yesterday’s war.

That one was over Internet search advertising, a booming category in which both Microsoft and Yahoo were humble and distant also-rans behind Google.

Microsoft may see Yahoo as its last best chance to catch up. But for all its size and ambition, the bid has not been greeted with enthusiasm. That may be because Silicon Valley favors bottom-up innovation instead of growth by acquisition. The region’s investment money and brain power are tuned to start-ups that can anticipate the next big thing rather than chase the last one.

And what will touch off the next battle? Maybe it will be a low-power microprocessor, code-named Silverthorne, that Intel plans to announce Monday. It is designed for a new wave of hand-held wireless devices that Silicon Valley hopes will touch off the next wave of software innovation.

No one really knows, of course, but gambling on the future is the essence of Silicon Valley. Everyone chases the next big thing, knowing it could very well be the wrong thing. And those who guess wrong risk their survival.

That is why, in this silicon-centric economy, front-runners do not stay front-runners for long.

Many big names of the 1980s — Commodore, Tandem, Digital Equipment and MicroPro — are in a graveyard shared by the highfliers of the 1990s — the At Home Network, Netscape and Infoseek, to name a few.

Now Yahoo, founded by Stanford graduate students who became media darlings and instant billionaires after an exhilarating initial public offering of stock, may be the next to disappear.

And Yahoo, which is based in Sunnyvale, Calif., is only 13 years old. Microsoft wants to buy the company for $44.6 billion as its way to compete with Google, the hot company of this decade, which was also founded by Stanford graduate students who became media darlings and instant billionaires after an exhilarating initial public offering.

“This is the very nature of the Valley,” said Jim Breyerof the venture capital firm Accel Partners. “After very strong growth, businesses by definition start to slow as competition increases and young creative start-ups begin to attack the incumbents.”

The economist Joseph Alois Schumpeter had a name for this principle of capitalism: creative destruction. Perhaps nowhere does it play out more dramatically — and more rapidly — than in Silicon Valley, where innovation unleashes a force that creates and destroys, over and over.

Microsoft, at the still-young age of 32, is making its largest acquisition because it, too, is affected by this force. Founded in 1975, Microsoft has had a longer run than most tech companies largely because it became very good at chasing the next big thing: an operating system, point-and-click computing, software for servers, Web services, video games, and, most recently, Internet search and online advertising.

Technological innovation may not have always been what gave Microsoft the edge. It has been frequently criticized for me-tooism and for getting it right the third time. Sometimes, marketing skill and bullying seemed also to be keys to its success. (To be fair, the creative use of those skills can also be regarded as a form of innovation.)

Microsoft won huge business battles, starting with its domination of personal-computer software against Apple during the 1980s. A decade later, it made quick work of Netscape Communications, which popularized Web browsing in the mid-1990s.

While Microsoft remains very profitable because of its lock on desktop software, its efforts to dislodge the Valley’s leading third-generation Internet company, Google, have so far failed.

Google’s central innovation, Internet search, has confounded Microsoft, despite investing billions in both technology development and numerous smaller acquisitions. Internet technology has overtaken the PC desktop as the center of the action, as people increasingly view the computer as merely a doorway to their virtual world. Google calls this phenomenon “cloud computing.”

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Google, based in Mountain View, Calif., has been setting up giant data centers around the globe. It benefited from the software innovations of hundreds of nimble garage start-ups to develop programs that reach millions of users over the Web.

It has unleashed the power of free — not a new idea for the Valley — to endear itself to a new generation of computer users with services they find they cannot live without, like e-mail, digital video and social networking.

Now Microsoft is trying to make up ground by buying what it has not been able to build. To many technologists and entrepreneurs here, the deal does not indicate any imminent threat to the Valley’s start-up culture or suggest that the region might go the way of Detroit; it underscores the health of the heartland that has produced waves of ever-more powerful technologies for more than half a century.

There is a sense here among investors that Microsoft, as a more effective counterweight to Google, might actually serve to spur innovation in the Valley.

“When Microsoft was in the ascendancy, there were whole areas of investment that were of less interest to investors,” said William R. Hearst III, an affiliated partner with the venture capital firm Kleiner Perkins Caufield & Byers. “Now you could enter a new area and people will think that maybe one of the two colossuses will be interested in acquiring your start-up.”

Innovation has been the driving force of Silicon Valley, and the results over the last quarter-century have been stunning. More than a billion personal computers are in use around the world. Cellphones are in the hands of three billion people. The next generation of mobile computers appears destined to reach another two billion people in just six more years.

The productivity gains from these devices have driven the world’s economy to faster economic growth and a higher standard of living for an ever-widening swath of the world’s population.

If Microsoft acquires Yahoo, some executives said, the question is whether it will shake its obsession with catching Google and instead look to the next generation of the Internet, even if it threatens Microsoft’s dominant position in PC software.

The bid for Yahoo “underscores how Microsoft’s hold on the personal computer desktop is meaning less,” said Nicholas Carr, author of “The Big Switch,” which describes the consequences of Internet computing.

In that sense, Microsoft may in a situation identical to the one faced by I.B.M. in the early 1980s. Dominant in the mainframe business and threatened by PCs, I.B.M. responded by quickly becoming the largest PC vendor.

However, despite all of its manufacturing proficiency, the PC business was far less profitable and I.B.M. was unable to make that business work. It took a wrenching cultural change and the shedding of its management and tens of thousands of employees to regain its footing.

Ultimately, Microsoft’s challenge in making its new acquisition work will be a cultural one. Can the giant software maker — which, incidentally, is based in Redmond, Wash., about 850 miles from Silicon Valley — use a huge acquisition to tap into what makes the Valley tick? Will it force Microsoft to look forward instead of backward?

To many, these questions frame the challenge that Microsoft confronts.

“To a large degree, it’s the willingness to move on and abandon something,” said David Liddle, a venture capitalist at U.S. Venture Partners. “It’s that ability to let something go and move on to the next big thing.”

A version of this article appears in print on , on Page A1 of the New York edition with the headline: Yahoo Deal Is Big, but Is It the Next Big Thing?. Order Reprints|Today's Paper|Subscribe